Upside down, is it turning?

Market reports
Thanim Islam
  • 2-year gilts at 5% but GBP declines
  • AUD declines as RBA is “finely balanced”
  • Food and drink prices decline


GBP broadly declined yesterday ahead of key inflation numbers tomorrow, despite yields on 2-year gilts rising above 5%. Last week we mentioned how inverted the US 2-10 year treasury curve was in the US, and noticeably the like-for-like in the UK is now at its most inverted since 2000. Ahead of tomorrow’s inflation numbers, a survey conducted by Lloyds Bank showed that production costs for UK food and drink manufacturers fell for the first time in May since 2016 - an early sign that inflationary pressures may be easing in the sector. Food and drink inflation rose to its steepest in March by 19.2%, and we saw a modest decline to 19.1% in April. It’s worth noting however that it can take weeks or months for this drop to be reflected in the prices that consumers pay.

The release of the RBA minutes this morning suggested that the recent decision to hike interest rates was a “finely balanced” call, suggesting that not all members were hawkish in their stance – AUD has weakened as a result.


Market rates

* Daily move - against G10 rates at 7:30am, 20.06.23

** Indicative rates - interbank rates at 7:30am, 20.06.23

Data points


  • USD – Fed Bullard

Our thoughts

Another quiet day on the data front today with US housing data and the hawkish Fed Bullard speaking tomorrow. GBP unlikely to have any major moves today until those inflation numbers tomorrow morning. Data last week suggested that wages between April and May declined, and suggestions this morning of a decline in food and drinks costs could be suggesting that perhaps inflation, finally, could be on the turn lower. If this results in lower repricing on interest rates then we could well be seeing the peak in GBP FX rates. But, this is a big IF - remember the last three inflation prints have come in higher than expected.

Chart of the day

Last week was focused on the inversion on the 2-10 yr treasury curve, and today's focus is on the equivalent on the gilt curve. Current levels are at the deepest inversion since 2000, which will be heaping a lot of pressure on the UK economy. This week’s inflation numbers, and commentary from the BoE, will be very key for GBP markets in determining whether the Bank is going to be on the path to interest rates of 5.75% or not.

Source: Bloomberg Finance L.P.

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